US auto companies boost productivity but labor costs weigh - study

JohnD. Stoll

DETROIT (MarketWatch) -- A closely watched report on the productivity of North American auto plants suggests U.S. auto makers are closing the gap when it comes to manufacturing productivity, but high labor costs overshadow Detroit's gains.

The Harbour Report, released Thursday, provides the latest evidence that General Motors Corp.
GM, -0.20%
Ford Motor Co.
F, +2.21%
and DaimlerChrysler AG's
DCX
Chrysler Group are making strides in vehicle quality and manufacturing effectiveness. The annual report said each of the Big Three cut the amount of hours it takes to produce a vehicle in North America by an average of 2% in 2006, and GM won three of the four "best plant awards."

At the same time, productivity numbers for industry leading Toyota Motor Corp.
TM, +0.15%
and Nissan Motor Co.
NSANY, -5.85%
fell, with Nissan recording a sharp 5.3% tumble from 2005. On the critical measure of vehicle-assembly productivity, "General Motors essentially caught Toyota" in 2006, Harbour Consulting President Ron Harbour said.

Productivity is considered an important measure on several fronts. Ford Manufacturing Chief Joe Hinrichs, in an interview, said the auto maker's 1.9% improvement in 2006 was directly reflected in improved vehicle quality, which is a leading consideration for many U.S. buyers. The annual J.D. Power & Associates Initial Quality Report, the industry's leading quality indicator, typically supports the claim that domestic vehicles are becoming more competitive with foreign brands. That firm releases its next quality report Wednesday.

Still, domestic auto makers continue to lag top performers in both quality and productivity and face the additional headwind of trying to continue to post improvements as their production numbers dwindle and material costs rise. "Improving productivity in the face of lower production is a huge accomplishment, but none of the domestic manufacturers can afford to let up," Harbour said.

Despite improvement, Detroit auto makers are staring at a growing profitability gap between themselves and the top Asian rivals, Harbour said. Toyota and Honda Motor Corp.
HMC, -0.57%
earned a $1,200 margin on each car sold in North America, while Chrysler lost $1,072, GM lost $1,436, and Ford lost $5,234. The disparity grew in 2006 as both Chrysler and Ford slipped into red ink due to falling market share, rising costs, restructuring charges and production cuts.

"Restrictive labor agreements that create cost disadvantages still exist and could jeopardize the survival of certain auto makers," Troy, Mich.-based Harbour said in its report. GM, Ford and Chrysler - which agreed earlier this month to be acquired by Cerberus Capital Management - will renegotiate the national contract with the United Auto Workers starting in late July.

U.S. auto makers continue to eye further productivity improvements. Ford arguably has made the biggest strides in this area, having inked so-called Competitive Operating Agreements at all but two of its U.S. assembly plants since early 2006 at an estimated savings of more than $1 billion.

"You can see the actions we're taking to address what has been a fundamental issue for us," Ford's Hinrichs said. "It's not just talk any more."

GM and Chrysler have struggled to replicate Ford's model but are in the process of negotiating similar deals at some plants with the UAW. Company executives say they can make considerable gains by outsourcing more noncore jobs in plants, such as delivery duties. They also can make strides by relaxing strict work rules.

Labor Costs Suffocating Big Three

According to figures furnished by DaimlerChrysler, the benefit and wage packages for a UAW worker employed by the Big Three was about $73.21 in 2006, compared with about $43.17 for a North American hourly worker employed by a Japanese auto company. At GM, for every one active worker it currently employs, it supports three surviving retirees, according to GM's annual report.

GM is the leading domestic auto maker in the Harbour Study, having boosted productivity 2.5% in 2006 to a point where it now takes the auto maker 32.36 hours to build a car, compared to Honda's 31.63 and Toyota's 29.93. The auto maker coupled that gain with a more-than-10% cut in UAW compensation, thanks to a health-care agreement and other moves, yet lost $4.6 billion in North America.

Analysts say that without winning significant reform on health-care costs from the UAW during the upcoming contract talks, GM's costs will inflate rapidly, making virtual incremental productivity improvements and job cuts insignificant because it simply will be spreading higher fixed labor costs over fewer hours worked and fewer active employees.

In a chart provided by Harbour, the firm shows how the Big Three consistently have been closing the productivity gap since 2002, with Chrysler making the biggest improvement to 32.9 hours. Even as Chrysler has improved productivity by 17.6% over the past five years, total UAW employee costs per hour worked have jumped 53% to $75.86 from $49.44, due mostly to a huge spike in health-care costs.

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